UGA RMIN 4000 STUDY EXAMS GUIDE ALL
QUESTIONS AND ANSWERS SET A+
✔✔enterprise risk - ✔✔a term that encompasses all major risks faced by a business
firm. such risks include pure risk, speculative risk, strategic risk, operational risk, and
financial risk
✔✔financial risk - ✔✔the uncertainty of loss because of adverse changes in commodity
prices, interest rates, foreign exchange rates, and the value of money
example: food delivers cereal at a fixed price to a supermarket chain for 6 months may
lose money if grain prices rise.
✔✔enterprise risk management - ✔✔combines into a single unified treatment program
all major risks faced by the firm
-by doing so it can offset one risk against another
✔✔systemic risk - ✔✔the risk of collapse of an entire system or entire market due to the
failure of a single entity or group of entities that can result in the breakdown of the entire
financial system
✔✔risk control - ✔✔techniques that reduce the frequency or severity of losses
1) avoidance
2) loss prevention
3) loss reduction
-duplication
-separation
-diversification
✔✔avoidance - ✔✔example: avoid the risk of being mugged in a high crime area by
staying away from high crime rate areas
, ✔✔loss prevention - ✔✔example: auto accidents can be reduced if motorists take a
safe-driving course and drive defensively
✔✔loss reduction - ✔✔example: department store can install a sprinkler system so that
a fire will be promptly extinguished
✔✔duplication - ✔✔having back ups or copies of important documents
✔✔separation - ✔✔assets exposed to loss are separated or divided to minimize the
financial loss from a single event
example: manufacturer may store finished goods in two warehouses in different cities
✔✔diversification - ✔✔reduced the chance of loss by spreading the loss exposure
across different parties.
example: foreign customers and domestic customers
✔✔retention - ✔✔an individual or a business firm retains part of all of the losses that
can result from a given risk
-used when no other method of treatment is available
-the worst possible loss is not serious
-losses are highly predictable
the retention level is the dollar amount of losses that the firm will retain
✔✔active retention - ✔✔active risk retention means that an individual is consciously
aware of the risk and deliberately plans to retain all or part of it.
example: motorist may wish to retain the risk of a small collision loss by purchasing an
auto insurance policy $500 or higher deductible
✔✔passive retention - ✔✔certain risks may be unknowingly retained because of
ignorance, indifference, laziness, or failure to identify an important risk
example: workers with earned incomes are not insured against the risk of total and
permanent disability
✔✔self insurance - ✔✔special form of planned retention by which part or all of a given
loss exposure is retained by the firm
✔✔noninsurance transfers - ✔✔another technique for managing risk. the risk is
transferred to a party other than an insurance company
QUESTIONS AND ANSWERS SET A+
✔✔enterprise risk - ✔✔a term that encompasses all major risks faced by a business
firm. such risks include pure risk, speculative risk, strategic risk, operational risk, and
financial risk
✔✔financial risk - ✔✔the uncertainty of loss because of adverse changes in commodity
prices, interest rates, foreign exchange rates, and the value of money
example: food delivers cereal at a fixed price to a supermarket chain for 6 months may
lose money if grain prices rise.
✔✔enterprise risk management - ✔✔combines into a single unified treatment program
all major risks faced by the firm
-by doing so it can offset one risk against another
✔✔systemic risk - ✔✔the risk of collapse of an entire system or entire market due to the
failure of a single entity or group of entities that can result in the breakdown of the entire
financial system
✔✔risk control - ✔✔techniques that reduce the frequency or severity of losses
1) avoidance
2) loss prevention
3) loss reduction
-duplication
-separation
-diversification
✔✔avoidance - ✔✔example: avoid the risk of being mugged in a high crime area by
staying away from high crime rate areas
, ✔✔loss prevention - ✔✔example: auto accidents can be reduced if motorists take a
safe-driving course and drive defensively
✔✔loss reduction - ✔✔example: department store can install a sprinkler system so that
a fire will be promptly extinguished
✔✔duplication - ✔✔having back ups or copies of important documents
✔✔separation - ✔✔assets exposed to loss are separated or divided to minimize the
financial loss from a single event
example: manufacturer may store finished goods in two warehouses in different cities
✔✔diversification - ✔✔reduced the chance of loss by spreading the loss exposure
across different parties.
example: foreign customers and domestic customers
✔✔retention - ✔✔an individual or a business firm retains part of all of the losses that
can result from a given risk
-used when no other method of treatment is available
-the worst possible loss is not serious
-losses are highly predictable
the retention level is the dollar amount of losses that the firm will retain
✔✔active retention - ✔✔active risk retention means that an individual is consciously
aware of the risk and deliberately plans to retain all or part of it.
example: motorist may wish to retain the risk of a small collision loss by purchasing an
auto insurance policy $500 or higher deductible
✔✔passive retention - ✔✔certain risks may be unknowingly retained because of
ignorance, indifference, laziness, or failure to identify an important risk
example: workers with earned incomes are not insured against the risk of total and
permanent disability
✔✔self insurance - ✔✔special form of planned retention by which part or all of a given
loss exposure is retained by the firm
✔✔noninsurance transfers - ✔✔another technique for managing risk. the risk is
transferred to a party other than an insurance company
